Notice2021-16965
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Adopt a Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information)
Primary source
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Published
August 10, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 151 (Tuesday, August 10, 2021)</title>
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[Federal Register Volume 86, Number 151 (Tuesday, August 10, 2021)]
[Notices]
[Pages 43698-43700]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-16965]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92561; File No. SR-FINRA-2021-009]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt a
Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to
FINRA Rule 4524 (Supplemental FOCUS Information)
August 4, 2021.
I. Introduction
On April 30, 2021, the Financial industry Regulatory Authority
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt a Supplemental Liquidity Schedule, and
Instructions thereto, pursuant to FINRA Rule 4524 (Supplemental FOCUS
Information).
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on May 18, 2021.\3\ The comment period closed on June 8, 2021.
The Commission received one comment letter in response to the
Notice.\4\ On June 22, 2021, FINRA extended the time period in which
the Commission must approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change to August 16, 2021. On July 7,
2021, FINRA responded to the comment letter received in response to the
Notice.\5\ For the reasons discussed below, the Commission is approving
the proposed rule change.
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\3\ See Exchange Act Release No. 91876 (May 12, 2021), 86 FR
27005 (May 18, 2021) (File No. SR-FINRA-2021-009) (``Notice'').
\4\ See Letter from Kevin Zambrowicz, Managing Director &
Associate General Counsel, the Securities Industry and Financial
Markets Association (``SIFMA''), dated June 8, 2021 (``SIFMA
Letter'').
\5\ See Letter from Adam Arkel, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission, dated July 7, 2021 (``FINRA
Letter''). The FINRA Letter is available on FINRA's website at
<a href="https://www.finra.org/sites/default/files/2021-07/sr-finra-2021-009-response-to-comments.pdf">https://www.finra.org/sites/default/files/2021-07/sr-finra-2021-009-response-to-comments.pdf</a>, on the Commission's website at <a href="https://www.sec.gov/comments/sr-finra-2021-009/srfinra2021009.htm">https://www.sec.gov/comments/sr-finra-2021-009/srfinra2021009.htm</a>, and at
the Commission's Public Reference Room.
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II. Description of the Proposed Rule Change <SUP>6</SUP>
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\6\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 86 FR at 27005-06.
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FINRA Rule 4524 provides in part that FINRA may require certain
members to file supplements to the Financial and Operational Combined
Uniform Single Report (``FOCUS Report''), which is filed pursuant to
Rule 17a-5 under the Exchange Act \7\ and FINRA Rule 2010. These
supplements may include such additional financial or operational
schedules or reports as FINRA may deem necessary or appropriate for the
protection of investors or in the public interest. FINRA Rule 4524
further requires FINRA to file a proposed schedule or report with the
Commission pursuant to section 19(b) of the Exchange Act. Pursuant to
FINRA Rule 4524, FINRA proposed to adopt a Supplemental Liquidity
Schedule (``SLS''), and Instructions thereto.
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\7\ 17 CFR 240.17a-5 (``Rule 17a-5''). Paragraph (a) of Rule
17a-5 requires a broker-dealer to file a version of the FOCUS
Report.
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A FINRA member that would be required to file the Form SLS would
report detailed information relating to the member's:
[[Page 43699]]
<bullet> Reverse repurchase and repurchase agreements;
<bullet> securities borrowed and securities loaned;
<bullet> non-cash reverse repurchase and securities borrowed
transactions;
<bullet> non-cash repurchase and securities loaned transactions;
<bullet> bank loan and other committed and uncommitted credit
facilities;
<bullet> total available collateral in the member's custody;
<bullet> margin and non-purpose loans;
<bullet> collateral securing margin loans;
<bullet> deposits at clearing organizations; and
<bullet> cash and securities received and delivered on derivative
transactions not cleared through a central clearing counterparty
(``CCP'').
According to FINRA, the SLS is tailored to apply only to members
with the largest customer and counterparty exposures. Unless otherwise
permitted by FINRA in writing, each carrying member with $25 million or
more in free credit balances, as defined under Exchange Act Rule 15c3-
3(a)(8),\8\ and each member whose aggregate amount outstanding under
repurchase agreements, securities loan contracts and bank loans is
equal to or greater than $1 billion, as reported on the member's most
recently filed FOCUS report, would be required to file the SLS. The SLS
would be required to be completed as of the last business day of each
month and filed within 24 business days after the end of the month. A
member would not need to file the SLS for any period where the member
does not meet the $25 million or $1 billion thresholds.
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\8\ 17 CFR 240.15c3-3 (``Rule 15c3-3'').
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III. Comment Summary
As noted above, the Commission received one comment letter in
response to the Notice.\9\ In its comment letter, SIFMA asked that the
implementation timing of the SLS be aligned with the implementation of
the Federal Reserve Board's ``6G'' reporting framework with respect to
the FR 2052a reports required to be filed by FINRA member firms that
have bank holding company affiliates,\10\ or that additional time be
allotted for the implementation of the SLS.\11\
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\9\ See supra note 4.
\10\ According to SIFMA, member firms are expected to be working
on the implementation of the Federal Reserve 6G reporting through
the end of 2022.
\11\ See SIFMA Letter at 3.
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Additionally, noting that some of the reporting requirements for
the SLS may be duplicative of information that must be reported to the
Federal Reserve Board on FR 2052a reports, SIFMA has asked that the SLS
contain an ``overlay'' that is mapped to the 5G/6G reporting frameworks
of the Federal Reserve Board. According to SIFMA, this would have the
effect of consolidating certain reporting categories where the
respective categories and definitions align for the FINRA and the
Federal Reserve Board reports, which would in turn streamline the
reporting process for firms that are required to file with both FINRA
and the Federal Reserve Board. Firms that are not required to file with
both FINRA and the Federal Reserve Board would not be impacted,
according to SIFMA.\12\
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\12\ See SIFMA Letter at 3-4.
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In response, FINRA reiterated that the proposed SLS is designed to
improve FINRA's ability to monitor for events that signal an adverse
change in the liquidity risk of broker-dealers that that file the
schedule. FINRA also noted the extensive prior outreach and discussions
that FINRA conducted regarding the potential burdens on broker-dealers
that are subsidiaries of bank holding companies. According to FINRA,
this consultation resulted in the alignment of categories in the
proposed SLS with reporting required in the Federal Reserve Board's
Complex Institution Liquidity Monitoring Report (referred to as ``FR
2052a'').\13\
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\13\ See FINRA Letter at 2.
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FINRA also stated the SLS serves an important regulatory purpose
because access to the information that would be reported on the SLS is
important for FINRA to efficiently monitor on an ongoing basis the
liquidity profile of its members. FINRA stated that the information
would facilitate FINRA's efforts to understand and respond to firms
that may appear similar based on their balance sheets, but in fact have
different liquidity risk profiles which could negatively the ability to
fund operations during periods of market stress or other stress events.
Absent the reporting set forth in the SLS, FINRA noted that it would
need to request such information on a firm-by-firm basis as the need
arises, which could, according to FINRA, result in similar or
potentially larger costs for some firms.\14\
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\14\ Id.
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While acknowledging that some members that would be subject to the
proposed SLS could face potential burdens with respect to reporting
requirements from other regulators, FINRA stated that it would revisit
the reporting categories in the proposed SLS as appropriate with
respect to potential alignments of such categories with other reporting
requirements, including the FR 2052a, depending on how they evolve in
the future. Consequently, FINRA stated that it believes it would not be
appropriate to delay implementation of the proposed SLS.\15\
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\15\ Id. at 3.
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Finally, FINRA stated that it believes that the proposed timeframe
for implementation of the proposed SLS set forward in the Notice
affords members sufficient time to prepare.\16\
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\16\ Id.
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IV. Discussion and Commission Findings
After careful review of the proposed rule change, the comment
letter, and FINRA's response to the comment letter, the Commission
finds that the proposal is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\17\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Exchange Act,\18\ which requires, among other
things, that the Commission determine any FINRA rule to be designed to
protect investors and the public interest.
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\17\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposed SLS, which will require
certain FINRA members, subject to the thresholds described above, to
provide detailed information regarding various aspects of the member's
liquidity profile will enable more effective monitoring of the
liquidity risk of FINRA members by the Commission and FINRA. The
Commission believes that regular and ongoing access to such information
is important for the purpose of understanding the liquidity risks that
member firms face, as well as differences in liquidity risks among
firms that otherwise may appear to be similar based on similar
characteristics in the firms' balance sheets. By enabling more
effective monitoring of liquidity risk, the Commission believes that
the information obtained through the SLS will protect investors and the
public interest by providing FINRA and the Commission with information
needed to better anticipate and respond to the risks that FINRA member
firms may face during market or other stress events that could
jeopardize their ability to fund their operations. FINRA estimates that
between 85 and 100 broker-dealers will be required to file Form SLS,
the universe of broker-dealers carrying customer accounts with at least
$25 million in free credit balances or with
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a minimum of $1 billion in repurchase agreements, bank loans or
securities loans outstanding. Therefore, the Commission believes that
the proposed Form SLS is reasonably designed to apply only to those
broker-dealers that have the highest potential to adversely affect
investors and the public interest in a liquidity stress event.
Finally, the Commission believes that FINRA has reasonably
addressed the concerns raised by SIFMA's comment letter. Specifically,
the Commission agrees that the SLS would serve an important regulatory
purpose by providing FINRA and the Commission with information useful
in evaluating a member firm's liquidity risk profile. While the
Commission recognizes that there is the potential for burdens on
certain member firms that are subject to the regulatory reporting
requirements of other regulators, the Commission believes that the
important regulatory purpose served by the SLS justifies the potential
burdens. The Commission believes that absent the SLS, FINRA and the
Commission would be required to request the information supplied in the
SLS repeatedly and on a firm-by-firm basis in order to obtain the
information necessary to monitor member firms for potential liquidity
concerns. Such an approach would not only create regulatory
inefficiency, but could also result in similar or potentially larger
costs for firms, as FINRA noted.
Moreover, in light of the prior outreach that FINRA has conducted
including publishing an earlier version of SLS in January 2018 and
revising it in response to feedback from industry participants,\19\ the
Commission believes that FINRA's proposed approach to revisit the
reporting categories in the SLS with a view to potential alignments of
such categories with other reporting requirements depending on how they
evolve would have the effect of further minimizing the regulatory
burdens on member firms subject to the SLS. Consequently, the
Commission believes that FINRA has appropriately addressed concerns
raised in the comment letter concerning reducing the reporting costs
imposed by the SLS.
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\19\ See Regulatory Notice 18-02 (January 2018) (Liquidity
Reporting and Notification). See also Notice, 86 FR at 27006.
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Finally, the Commission agrees with FINRA that it is not
appropriate to delay implementation of the SLS beyond the timeframe set
forth in the Notice. Because FINRA previously published a version of
the SLS in 2018, and will announce an effective date that will be 180
days following the publication of a Regulatory Notice published no
later than 30 days after Commission approval, the Commission believes
that member firms will have sufficient time to prepare to implement the
SLS. Furthermore, in light of recent events connected to market
volatility, which were discussed in the Notice,\20\ the Commission
believes that further delaying implementation of the SLS will undermine
the regulatory interest that the Commission and FINRA have in
monitoring member firms' liquidity risk profiles.
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\20\ See Notice, 86 FR at 27005.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-FINRA-2021-009) be, and
hereby is, approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16965 Filed 8-9-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 10, 2021.
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